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the probability that an event will occur that will harm a bank |
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the probability that an event will occur that will benefit a bank |
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Risk management is particularly important for banks because they are |
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the act of organizing, leading, directing, and controlling resources available to an organization that accomplishes its goals. |
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consists of a central bank, collection of markets and institutions, rules of conduct among them, and supervisory authorities. |
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The Federal Reserve System |
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Has responsibility for monetary policy, bank supervision, financial system liquidity, payment system matters |
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is where financial assets (securities) such as stocks and bonds can be bought or sold. |
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debt securities with a maturity of one year or less (e.g., T-bills, commercial paper, negotiable CD ) |
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Capital market securities |
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securities with a maturity or life greater than one year (e.g., bonds, mortgages, mortgage backed securities, stocks) |
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securities that derive their value from an underlying asset (e.g., futures, forwards, options) |
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provide a low cost way to raise capital, diversify risk, and increase investor liquidity. |
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corporations that are the primary source of business credit, important source of consumer loan and deposit services, and principle operators of the payment system. |
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mutual organizations or corporations that provide deposit services, mortgage, consumer and business credit. |
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mutual organizations that provide deposit services and consumer credit to those specified in their field of membership. |
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mutual organizations or corporations that provide businesses and individuals life, health, property protection from unexpected events. |
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partnerships or corporations that buy/sell securities on behalf of others (agents) and for themselves (principals), underwrite and sell new equity and debt issues. |
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any fund, plan, or scheme that provides retirement income. |
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trust or corporation that consists of a pool of funds collected from investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. |
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corporations that provide consumer and short-term business credit. |
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Government Sponsored Enterprises (GSEs) |
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corporations created by the U.S. government to fund such things as homes, education, agricultural production (e.g., FANNIE MAE, Salle Mae, FarmerMac) |
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Responsibilities of financial system participants |
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Disclosures, Payment forms, Delivery terms – what, when, Contract enforcement -- default |
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Number of banks _______ by more than half since 1980 |
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At the same time the number of branches offices has______by more than 60 percent. |
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“separation of banking and commerce.” |
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A fourth feature of the U.S. banking system |
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From a public policy perspective, they help maintain separation of banking and commerce. From a banker’s perspective, they provide a way to be a more effective competitor. |
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Provide financial strength to their bank subsidaries |
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serve as tax shelters and financing vehicles for ownership changes of community banks. |
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A Bank Holding Company is |
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An entity that owns or control 25 percent of any class of voting stock of a bank or has a majority of its directors in common with a bank is a bank holding company. |
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bank holding companies can elect to be |
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financial holding companies. |
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Financial holding companies were created by the |
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Gramm-Leach-Bliley Act of 1999 |
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Financial Holding Companies can |
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•insurance underwriting,
•securities dealing and underwriting,
•financial and investment advisory services,
•merchant banking*,
•issuing or selling securitized interests in bank-eligible assets, and for the most part,
•any non-banking activity authorized by the Bank Holding Company Act. |
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_____ banks are more likely to follow a transactions (high frequency, standardized, automated) banking approach while ______ banks tend to favor a relationship (close customer contact, non-standardized, cross-marketing) model that adds customer value. |
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A ______ banking organization will offer a wider array of products and services and fund its operations over a large geographic area or the world. |
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Primary focus of _______ banks is making loans and gathering deposits in the local community |
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general banking business bank |
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credit card operations, limited deposit powers, limited lending authority |
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engage in fiduciary activities |
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provides banking service to other banks and their employees |
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serve socially and economically disadvantaged individuals |
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Community development banks |
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serve low-to-moderate-income individuals or communities or other areas targeted for redevelopment |
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Edge Act and Agreement Corporations |
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provide international banking services |
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make small consumer and business loans |
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Foreign branches and agencies |
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make short-term and long-term loans, accept deposits |
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International banking facilities |
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owned by other banking types to help them compete for foreign loans and deposits. |
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is the monitoring of banks in order to determine if they are being operated safely and soundly and are in compliance with laws, rules, and regulations. |
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Bank Supervision Activities |
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•Offsite monitoring of periodic financial reports
•Bank examinations and bank holding company inspections
•Supervisory actions
•Processing charter and branch applications, bank mergers/acquisition, and change in control notifications |
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Reasons why we have Bank Supervision |
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•Protection of the safety of the public’s savings
•Ensure equal opportunity and fairness in credit access and to insure appropriate customer disclosures
•Avoid concentration of power
•Promote public confidence in the financial system |
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Bank supervisory agencies |
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•Comptroller of the Currency (OCC)
•Federal Deposit Insurance Corporation (FDIC)
•Federal Reserve System
•State Banking Boards or Commissions |
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Other supervisory agencies |
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•Department of Justice (anti-trust)
•Securities and Exchange Commission (financial reporting/disclosures, securities regulation)
•U.S. Treasury (anti-money laundering, anti-terrorism) |
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OCC, A bureau within the Department of Treasury |
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•Oldest of the federal banking supervisors, established by the National Bank Acts, 1863,1864.
•Charters national banks
•Primary supervisor for national banks |
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United States Consumer Financial Protection Bureau |
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•Created by Dodd-Frank Wall Act of 2010
•Examines and enforces consumer regulations for larger banks, those with assets over $10 billion. |
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Federal Financial Institutions Examination Council |
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Formal interagency body that prescribes uniform principles, standards, and report forms for the federal examination of financial institutions. Work to promotes uniformity with state banking supervisors as well. |
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State banking department or commissions |
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Charter state banks, Supervisor of state banks |
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The Report of Condition and Income is often referred to as the |
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Generally examinations and inspections … |
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are a forward looking assessment of risk management and financial factors. |
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Formal Supervisory Actions |
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The agencies use these actions to address unsafe, unsound practices, and violation of laws. Ex.Insurance Termination and Consent Orders |
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Informal Supervisory Actions |
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These agencies use these actions on fundamentally sound institutions but want written committments from the board of directors to address identified issues. Ex. Memorandum of Understanding |
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Ultimate outcine if poor management |
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The banking agencies under the 1960 Bank Merger Act and its 1966 amendment review and approve |
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bank acquisitions and mergers |
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These types of transactions are referred to as _________ or “market extension” mergers or acquisitions. |
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The risk that a bank won’t receive the principal and interest it is owed. |
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The risk that a bank won’t be able to meet its cash needs in a timely manner and at a reasonable cost |
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The risk that a bank’s earnings and capital might be adversely affected by changes in interest rates, exchange rates or securities prices |
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The risk that unanticipated internal or external events such as equipment breakdowns, “acts of God,” customer and employee fraud and undetected software errors will harm the bank |
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The risk that unenforceable contracts, lawsuits, or adverse judgments will harm the bank |
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The risk that negative publicity will harm a bank’s public image. |
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focus on return on equity or net income/equity capital, the return they receive on their investment |
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focus on return on assets or net income/assets, a bank’s effectiveness and efficiency in generating operating results |
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tells you where you are; use it to judge adequacy. |
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tells you direction, use it to see where the bank may be going |
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Assets= Liabilities plus Capital |
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debit an asset to increase it; credit an asset to decrease it; reverse for a liability – debit to decrease, credit to increase. |
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are “as of” end of calendar quarters |
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are listed according to there convertibility to cash, liabilities by how soon they are due |
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Risk taking by a bank shows up on the balance sheet |
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assets and liabilities) – maturity structure, receipt and payment frequency, liquidity, market risk sensitivity, credit quality |
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Cash and Deposits Due from Bank |
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Vault cash Deposits with other banks (e.g., correspondent deposits) Cash items in process of collection Reserve account with the federal reserve |
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Sometimes cash items are called |
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Reverse repurchase agreements |
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– bank takes temporary title to securities owned by borrower (securities basically serve as collateral for a loan to the borrower) |
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Divided into two accounts |
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held to maturity” and “available for sale” |
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Usually the largest asset on balance sheet Gross loans and leases – Sum of all loans and leases |
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Off-balance-sheet transactions |
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expose a firm to counterparty risks (credit risk) and liquidity risk |
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moving items off balance sheet, delaying payments, recording unearned revenues |
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Auditing Financial Statements |
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Audit Committees (independent directors, banking or financial expertise, not large bank customer, FDICIA 1991) Sarbanes-Oxley Accounting Standards Act |
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income statement components |
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Interest Income - Interest Expense = Net Interest Income +Noninterest income - Noninterest Expense Provision for Loan Loss Net Income Before Taxes - Taxes Net Income Dividends Retained earnings |
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